Saturday, March 31, 2012

The daily bar chart pattern of the BSE Sensex shows the index consolidating within a ‘falling wedge’ pattern that was identified last week. It is a consolidation pattern, which means the trend preceding the consolidation should resume after the break out. Though triangles can be quite fickle in predicting trends, a ‘falling wedge’ - which is a triangle with two of its sides pointing downwards – has bullish implications.

The upward break out from a ‘falling wedge’ can be a slow, gradual break that may start off like a sideways movement before it picks up speed. There is supporting evidence for an upward break out from the technical indicators. Three of them are showing positive divergences by touching higher bottoms (marked by blue arrows), though all four are still looking bearish.

The MACD is falling below its signal line in negative territory. The ROC has crossed above its 10 day MA and about to enter the positive zone. The RSI bounced up from the edge of its oversold zone, but hasn’t crossed above its 50% level. The slow stochastic is trying to emerge from its oversold zone. All three EMAs are converging – like they did back in Jul ‘11. A sharp move usually follows. Will the move be upwards this time?

NSE Nifty 50 index chart

The answer to the question is visible in the weekly closing chart pattern of the NSE Nifty 50 index. The rally that started from the Dec ‘11 low went past four likely resistances – the 20 week EMA, the 50 week EMA, the blue down trend line and the long-term support-resistance level of 5270. Note that the weekly volumes kept increasing, showing underlying strength.

After such a strong rally of 1100 points, a pullback to the 50 week EMA or the blue down trend line was expected. Such pullbacks provide buying opportunities to those who missed out on the rally. But the pullback has bounced up from the 5270 level. The 20 week EMA has almost merged with the 50 week EMA, and a cross above will technically confirm a bull market. But it is unlikely to be a runaway bull market.

The technical indicators have corrected overbought conditions and are still looking bullish. The MACD is positive and above its signal line. The ROC has crossed below its 10 week EMA, but remains positive. The RSI has entered its overbought zone for the first time since Nov ‘10. The slow stochastic has slipped down from its overbought zone. All four indicators are showing positive divergences by reaching higher tops (marked by blue arrows) while the Nifty touched a lower top. All signs are pointing to a resumption of the up move.

What can spoil the bull party? Our inept government of course! As if the various scams and poor floor management of its own allies wasn’t enough, they have now shaken the confidence of the FIIs by introducing a draconian GAAR policy in a bid to plug a tax loophole. If the FIIs start packing their bags, all bullish bets will be off.

Bottomline? Chart patterns of the Sensex and Nifty indices are consolidating after sharp rallies. Despite high interest rates, high oil prices and a falling Rupee, India’s comparatively higher GDP growth has attracted FIIs. Our geriatric political leaders are experts at shooting themselves in the foot. Instead of cracking down on FIIs, they should put their own house in order. Only then can India truly shine. This is as good a time as any to start accumulating good large and mid cap stocks. You can choose several from the stocks covered on the right panel of this blog.

Thursday, March 29, 2012

There are two kinds of people in this world – those who think, and those who do. Most people have a strong urge to do something – specially when it comes to investments – without any thinking beforehand. Better sense prevails after losing a lot of money. Then they move to the opposite end of the spectrum by thinking way too much and not doing enough. Rare is the person who displays an appropriate mix of thinking and doing.

In this month’s guest post, KKP shares an interesting article and his insights about how to be successful in your endeavours through a combination of strategic thinking and decision making.

You're the boss of your own life and family, but you still spend too much time on the day-to-day mundane activities. Strategic Thinking is something I learned in my 20’s and am still learning. What is the opposite of Strategic Thinking? “Tactical Thinking” or simply “Implementation”. I have come across many personalities in my life, and there are great minds that are Strategic Thinkers and then there are great people who are Executors or Action Takers. It is the mix of both of these qualities that makes one ‘truly’ successful. Generally speaking, I find more ‘executor or action takers’ than strategic thinkers.

In my mind, strategic thinking is to constantly evaluate the ‘big picture’ so that results can be dramatically improved or risks can be dramatically reduced. As an investor, this means allocating some of your assets to a ‘strategy’ that has a higher probability of success. You might ask: What is it? Well, strategizing is to hunt for methods that are above and beyond your current capacity to think, or outside of your comfort zone, such as Selling Puts and Selling Calls to add to an income stream. If you are a trader, this might mean allocating some of your assets to a ‘strategy’ employed by investors that has a lower probability of failure. Again, you might ask: What is it? Again, strategizing might mean looking into Value Cost Averaging as a method to not trade out of a stock, but to continue to invest in it as the stock moves up. Strategizing is ensuring that something fits into the big picture well, can be executed correctly, and ensuring that it will improve the bottom line results (increase probability of success/gains, and/or reduce probability of failure/losses).

So, this month, I am dedicating my write-up to something that will really help you on your long road to success in life.

In the beginning, there was just you and your partners. You did every job. You coded, you met with investors, you emptied the trash and phoned in the midnight pizza. Now you have others to do all that and it's time for you to "be strategic." Whatever that means.

If you find yourself resisting "being strategic," because it sounds like a fast track to irrelevance, or vaguely like an excuse to slack off, you're not alone. Every leader's temptation is to deal with what's directly in front, because it always seems more urgent and concrete. Unfortunately, if you do that, you put your company at risk. While you concentrate on steering around potholes, you'll miss windfall opportunities, not to mention any signals that the road you're on is leading off a cliff.

This is a tough job, make no mistake. "We need strategic leaders!” is a pretty constant refrain at every company, large and small. One reason the job is so tough: no one really understands what it entails. It's hard to be a strategic leader if you don't know what strategic leaders are supposed to do.

After two decades of advising organizations large and small, my colleagues and I have formed a clear idea of what's required of you in this role. Adaptive strategic leaders — the kind who thrive in today’s uncertain environment – do six things well:

Anticipate

Most of the focus at most companies is on what’s directly ahead. The leaders lack “peripheral vision.” This can leave your company vulnerable to rivals who detect and act on ambiguous signals. To anticipate well, you must:

Look for game-changing information at the periphery of your industry

Search beyond the current boundaries of your business

Build wide external networks to help you scan the horizon better

Think Critically

“Conventional wisdom” opens you to fewer raised eyebrows and second guessing. But if you swallow every management fad, herdlike belief, and safe opinion at face value, your company loses all competitive advantage. Critical thinkers question everything. To master this skill you must force yourself to:

Reframe problems to get to the bottom of things, in terms of root causes

Challenge current beliefs and mindsets, including your own

Uncover hypocrisy, manipulation, and bias in organizational decisions

Interpret

Ambiguity is unsettling. Faced with it, the temptation is to reach for a fast (and potentially wrongheaded) solution. A good strategic leader holds steady, synthesizing information from many sources before developing a viewpoint. To get good at this, you have to:

Total consensus is rare. A strategic leader must foster open dialogue, build trust and engage key stakeholders, especially when views diverge. To pull that off, you need to:

Understand what drives other people's agendas, including what remains hidden

Bring tough issues to the surface, even when it's uncomfortable

Assess risk tolerance and follow through to build the necessary support

Learn

As your company grows, honest feedback is harder and harder to come by. You have to do what you can to keep it coming. This is crucial because success and failure - especially failure - are valuable sources of organizational learning. Here's what you need to do:

Encourage and exemplify honest, rigorous debriefs to extract lessons

Shift course quickly if you realize you're off track

Celebrate both success and (well-intentioned) failures that provide insight

Do you have what it takes?

Obviously, this is a daunting list of tasks, and frankly, no one is born a black belt in all these different skills. But they can be taught and whatever gaps exist in your skill set can be filled in. I'll cover each of the aspects of strategic leadership in more detail in future columns. But for now, test your own strategic aptitude (or your trading mind or your company's) with the survey at www.decisionstrat.com.

KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Wednesday, March 28, 2012

There is good news and bad news for investors who track the Nifty index closely. First the good news:

1. The Nifty is testing support from the long-term support-resistance level of 5170;

2. Just below the 5170 level is the blue down trend line, which is currently at 5120 and should provide support in case 5170 gets breached;

3. The 50 day EMA is still above the 200 day EMA;

4. There are positive divergences in three of the four technical indicators which have reached higher bottoms while the Nifty touched a slightly lower bottom;

5. Last, but not the least, the Nifty appears to be consolidating within a ‘falling wedge’ pattern, which has bullish implications.

Now, the bad news:

1. For the second time in three days, the Nifty closed below the 200 day EMA;

2. The 20 day and 50 day EMAs are falling, and the 50 day EMA seems all set to cross below the 200 day EMA (like it did in May ‘11);

3. In case the Nifty falls below the blue down trend line, there is no real support – except for the 50% Fibonacci retracement level (5080) of the entire Dec ‘11 to Feb ‘12 rally;

4. The technical indicators are bearish. The MACD is below its signal line and has dropped into negative territory. The ROC is negative and below its 10 day MA. The slow stochastic has fallen back inside its oversold zone. Only the RSI – which has risen from the edge of its oversold zone to the 50% level - is neutral;

5. What appears to be a bullish ‘falling wedge’ can very well turn out to be a bearish ‘descending triangle’ pattern, with the 5170 level acting as the horizontal side of the triangle.

The good news and bad news have nullified each other, leaving a big question mark about Nifty’s likely behaviour in this expiry weak. What should investors do? Stay patient and disciplined and stick to your asset allocation plan. The Nifty is dancing to the tune of the FIIs and DIIs. If you try to dance with elephants, the dance is likely to be short-lived!

Tuesday, March 27, 2012

Almost every evening, before dozing off to sleep, I get my daily ‘fix’ of TV watching. During the weekends, it is usually the live telecast of a soccer or a tennis match. Occasionally, a golf tournament. But during weekdays, it is invariably a wild life programme. The eternal game of life and death that plays out on the vast grasslands of Africa is fascinating to watch.

Human society has a hierarchical system, based on a combination of political power and money. The animal kingdom has its own hierarchical system, based on size and physical power. The lion is often referred to as the ‘king’ – but the king doesn’t mess around with an elephant or a rhinoceros.

Humans have been endowed with mature brains that can think creatively to plan and implement strategies that can enhance and improve their standard of living. Animals are less endowed in thinking skills and rely more on instinct and training to survive.

What has all this got to do with being an investor? Survival of the fittest works in the stock market, just as it does in the African savanna. To ensure survival and prosperity, you have to first decide what kind of an ‘animal’ you are and what kind of an ‘animal’ you aspire to be.

If you have not inherited a huge sum of money, don’t plan on being a lion of the stock market. If you are not the favourite relative of a powerful minister, being an elephant or a rhinoceros is out of the question. That leaves some of the less powerful and smaller animals.

The next decision – to carry the analogy a little further – is to decide if you want to be a predator, a prey, or a scavenger. A bit of honest self-analysis is needed here. If you have enough knowledge, experience and cash – you can be a leopard or a cheetah. That means playing in the same arena as the big boys, but keeping out of their territory. An example? Stay out of stocks where RJ or RD are known to have large stakes. Those who have been badly wounded in Bilcare or Delta Magnets may know what I’m talking about.

Why should you decide to be a prey? Strangely, some investors do precisely that. They hand over their trading account to a broker or a bank (mistakenly referred to as ‘wealth managers’). They are usually HNIs – meaning wealthy and may be quite powerful – who are just not bothered about the dangers that lurk among the tall grass. Like the zebras and the wildebeests, they become dinner (I mean, their money gets siphoned off by the wealth managers).

‘Scavenger’ sounds like a dirty word. But there are solid advantages to being a vulture or a jackal – if you are willing to do a little hard work. If you have the ability of spotting an investment opportunity (usually a less known mid-cap or small-cap stock) before other scavengers jump onto the bandwagon, you can be in and out with a tidy profit.

Moral of the story? Your investment success will depend on your survival skills and the amount of staying power (spare cash) you have.

Monday, March 26, 2012

In last week’s analysis of the S&P 500 index chart pattern, negative divergences were observed in the technical indicators, which failed to reach new highs as the index rose above the 1400 level. The index spurted to new intra-day and closing highs on Mon. Mar 19 ‘12, but on lower volumes. A brief correction followed, which got good support from the rising 20 day EMA.

The index is trading above all three of its EMAs, which are rising in tandem. The bull market seems to be gaining in strength. The technical indicators are bullish. The slow stochastic has slipped down to the edge of its overbought zone. The MACD is positive and touching its signal line. The RSI is above its 50% level. The ROC is positive.

The US economic indicators show that growth is still painfully slow. Initial unemployment claims dropped to 348,000 – its lowest level in 4 years. But new job additions are offering lower pay, which is leading to lower demand. Gasoline prices are trending higher. Industrial production remained flat in Feb ‘12. So did housing starts and existing home sales.

FTSE 100 Index Chart

Negative divergences in the technical indicators of the FTSE 100 index chart last week had signalled a possible correction. A sharp drop received good support from the 50 day EMA for the second time during the month. The index is trading above its 50 day and 200 day EMAs, so the bull market is not under any threat.

The technical indicators have weakened because of the corrective move last week – but remain mildly bullish. The slow stochastic hasn’t dropped below its 50% level yet. The MACD is below its signal line, but in positive territory. The RSI has slipped below its 50% level, but turning up. The ROC is positive.

The weekly bar chart pattern of the Sensex shows five straight weeks of losses. That is the bad news. The good news is that the index has closed on or above its 50 week EMA for nine straight weeks. The upper edge of the downward sloping channel is also providing good support to the index.

The Sensex is tantalisingly poised for a break out in either direction – but the odds slightly favour the bulls. The technical indicators are bullish, but showing some weakening signs. The MACD is positive and above its signal line, but the gap between the two is narrowing. The ROC is also positive, but has crossed below its rising 10 week MA. The RSI has entered its overbought zone for the first time since Oct ‘10, and showing positive divergence. The slow stochastic has dropped down from its overbought zone.

The Sensex appears to be consolidating within a falling wedge pattern, which has bullish implications.

NSE Nifty 50 index chart

The daily closing chart of the Nifty appears to be consolidating within a bullish falling wedge pattern from which the break out should be upwards. Volumes have been sliding – which is quite common during consolidation periods.

The technical indicators are looking bearish. The MACD is falling below its signal line, and about to enter negative territory. The ROC has dropped below its 10 day MA into the negative zone. Both the RSI and the slow stochastic are below their 50% levels.

The index can be expected to consolidate some more before it eventually breaks out. FIIs are still net buyers but their buying pressure has slowed down. The DIIs have mostly been selling to keep the index from rising sharply.

Bottomline? Chart patterns of the Sensex and Nifty indices appear to be consolidating within falling wedge patterns. The likely break out – which can happen over the next couple of weeks - should be upwards. This is a good time to enter fundamentally strong large cap stocks. Once the RBI starts to cut interest rates, market sentiments will get a boost.

Saturday, March 24, 2012

What are market breadth indicators and why should we look at what they are signalling? Investors tend to focus on Sensex or Nifty movements. These indices comprise 30 and 50 stocks respectively, and are supposed to represent overall market trends and movements. But thousands of stocks are traded every day. Market breadth indicators try to capture the mood of the broader markets by measuring how many shares went up in price versus how many went down.

Last week, the stock market turned quite volatile. The Nifty went up 90 points one day, only to fall 130 points the next day, followed by an up move of 50 points. What caused this volatility and what should investors do in such a situation? The main reason for volatility is near-term uncertainty about market movements. All the major trigger events that were supposed to boost the bullishness caused by FII buying – state election results, RBI’s policy review and the budget – turned out to be damp squibs. The next trigger event – Q4 results – is still three weeks away.

No wonder investors are not sure what is going to happen next. A look at the market breadth indicators may provide some clues.

Nifty A-D Line

The A-D line (in red) has been falling along with the Nifty (in blue) since both touched their recent (Feb ‘12) peaks. This is normal behaviour. The A-D line is supposed to follow the Nifty. So, we need to look at divergences or differences in patterns. Note that last week’s bottom in the Nifty was slightly higher than its previous bottom. But the A-D line dropped to a lower bottom. Also note that the Feb ‘12 top on the Nifty was higher than its Nov ‘11 top, but the A-D line reached a lower top. These are negative divergences (similar to the ones that occurred in Jun-Jul ‘11 and in Sep-Nov ‘11), which could be signalling a deeper correction.

Remember that there are no certainties in technical analysis – only possibilities and their probabilities. If you are holding longs, maintain proper stop-losses.

Nifty TRIN

The TRIN has bounced up from the edge of its overbought zone (below 0.7). Note that the TRIN had reached heavily oversold zone (above 1.2) back in Dec ‘11, just before the sharp rally started. But the heavily overbought situation in Jan ‘12 – when the TRIN dropped to 0.5 – did not trigger a correction. However, the sharp correction in Jul ‘11 started when the TRIN had bounced up from 0.7. So, be prepared but not afraid of a correction.

In a mid-week update of the Nifty chart, it was mentioned that all four technical criteria of a bull market have been met. So, the strategy from here on should be to buy the dips. But ‘recency bias’ may be preventing investors from entering. The FIIs are continuing with their buying. If they suddenly start selling then only can one expect a steep fall. But why would they do so? Asian indices are in bull markets. So are FTSE and S&P 500 indices. Compared to the global indices, Sensex and Nifty suffered much more prolonged bear markets, though current valuations are not exactly cheap. Neither are they too expensive.

Moral of the story? Investors can stay invested as per their asset allocation plans. Traders can try to make some quick money from the daily price swings. Both should maintain appropriate stop-losses.

Friday, March 23, 2012

Two weeks ago, the chart patterns of the Jakarta Composite, Singapore Straits Times and Malaysia KLCI indices had entered bull markets but the bears hadn’t given up the fight completely. The situation hasn’t changed much since then. All three indices have not yet been able to overcome their overhead resistances.

Jakarta Composite Index Chart

The Jakarta Composite index is trading above all three of its rising EMAs and within the upward sloping channel. The bull market is alive and kicking. But the resistance from the 4030 level is proving to be quite strong.

The technical indicators are mildly bullish, but showing negative divergences. The MACD is positive and above its signal line. The ROC is positive and touching its 10 day MA. The RSI has dropped after touching the edge of its overbought zone. The slow stochastic has slipped down from its overbought zone.

Expect some sideways consolidation before the 4030 level gets breached. Buy the dips.

Singapore Straits Times Index Chart

The Singapore Straits Times index had bounced up from its rising 50 day EMA but failed to get past the 3030 level once again, and has dropped down to seek support from its 20 day EMA. Despite today’s high volume spurt, the index closed lower for the week.

The technical indicators are slightly bullish. The MACD is positive, but falling below its signal line. The ROC is also positive and touching its 10 day MA. The RSI is at its mid-point. The slow stochastic has dropped down from its overbought zone.

Expect the bears to put up a strong fight to defend the Aug ‘11 gap in the chart. As and when that gap gets filled, the bulls will be unstoppable.

Malaysia KLCI Index Chart

Negative divergences were observed in the technical indicators of the Malaysia KLCI index two weeks ago, but investors were advised against shorting a bull market. A correction down to the rising 20 day EMA provided another opportunity to enter.

The technical indicators are not showing much bullish strength. The MACD is positive but below its signal line. The ROC is just above its 10 day MA and barely positive. The RSI has slipped below its 50% level. The slow stochastic has climbed above its 50% level.

The Jul ‘11 top of 1597 needs to be breached before the bulls can resume complete dominance.

Bottomline? The Asian index charts are in bull markets, but the bears are putting up a stubborn fight. It is a question of when, not if, they will get vanquished. Add on dips, or hold on for the ride.

Thursday, March 22, 2012

What is ‘recency bias’ and why should it cloud any one’s long-term view of the stock market? As human beings, we tend to be more emotional than rational – specially when it involves investing in stocks or mutual funds. The two emotional extremes of greed and fear has dominated investment behaviour through the ages – from the boom and bust of ‘tulipmania’ in 17th century Holland to the ‘dot.com mania’ in the USA in 1999-2000 and the ‘real estate mania’ in the USA and India 5 years ago.

‘Tulipmania’ happened too long ago. ‘Dot.com mania’ is almost a forgotten story. Its effects were restricted to the technology sector anyway. But effects of the ‘sub-prime’ crisis in the USA and the ‘land bank’ story in India are still remembered and felt by investors. This is how ‘recency bias’ takes hold of our psyche. We tend to remember what has happened more recently and get biased about what is likely to happen in the future.

It requires a lot of mental discipline and experience to take a dispassionate view of the market. Overcoming greed and fear is a difficult proposition when your hard-earned money is at stake. Being able to decide against the current market fads and themes requires strong nerves and conviction. But even experienced investors some times allow their long-term view of the market to get clouded by ‘recency bias’.

For instance, the recent bear period from Nov ‘10 to Dec ‘11 caused many seasoned and new investors to take extremely bearish views of the market. ‘Filling the gap’ formed in the Sensex chart in May ‘09 (after the Lok Sabha election) and a further fall to test the Mar ‘09 low were discussed on TV channels and investment groups. Questions were raised whether the Sensex was in a secular bear market that started in Jan ‘08 and whether the enter rally from Mar ‘09 to Nov ‘10 was a bear market rally. Memories of the massive crash in 2008 were obviously fresh in investor minds.

More recently, the rally from the Dec ‘11 low to the Feb ‘12 high prompted many experts to talk about a possible test of the Nov ‘10 peaks on the Sensex and Nifty. One report from an overseas brokerage gave detailed technical explanations of why the Nifty will touch 10000. But when the index reacted from 5600, there were opinions galore about a fall to 4800 or even a test of the previous low of 4500. And so it goes on.

‘Recency bias’ can be good or bad for your portfolio’s health. It can be bad if you are not aware that you may have such a mental bias. If you are sitting on a lot of cash because you wanted to invest if the Nifty fell below 4000 and failed to invest at 4500, then your returns on that cash has been negligible. If you are still waiting to invest because you think the Nifty may fall below 5000, your are allowing your long-term view to be clouded by ‘recency bias’.

‘Recency bias’ can be good if you are aware of it and take suitable investment decisions. For instance, high inflation rate led to increased interest rate. If you do not project higher interest rate into the future, and invest a portion of your cash in a bank fixed deposit or tax free bonds to avail of the current high rates, it can provide stability to your investment portfolio. If you slowly accumulate fundamentally strong stocks trading near their 52 week lows, then you are not allowing ‘recency bias’ to cloud your long-term view of the stock market.

How do you separate emotion and ‘recency bias’ from your investment decisions? One way is to regularly invest your monthly savings without paying too much attention to index levels. Another way is to make an asset allocation plan as per your risk tolerance and financial goals, and let the plan provide the signals for buying and selling.

Wednesday, March 21, 2012

Three important trigger events – state election results, RBI’s policy review and the budget - which were supposed to give a new direction to Nifty’s chart pattern failed to make much impression on the stock market.

Election results were mildly negative for the market – since the Congress was expected to do better. RBI’s policy review was a non-event because a CRR cut was announced earlier and interest rate cut was kept in abeyance. The budget was mildly positive in a roundabout way – there were no negative surprises.

The next trigger will be India Inc’s Q4 results, which should start hitting the market in another three weeks. Those are not likely to be a big improvement over Q3 results. Till then, global liquidity flows will rule the Indian market.

The Nifty daily bar chart is showing the effect of indecision among market players:

The down trend line that dominated the Nifty chart for more than a year was breached in Feb ‘12, followed by a pullback towards the down trend line. Such pullbacks are quite common after breach of support-resistance levels and can be opportunities for selling or buying.

Note that at its recent intermediate top at 5630, the Nifty gained more than 20% from its Dec ‘11 low of 4531, and retraced more than 50% of its fall from the Nov ‘10 peak of 6338. The index is trading above its 200 day EMA, and the ‘golden cross’ of the 50 day EMA above the 200 day EMA has confirmed a return to a bull market. All four technical criteria that determine a bull market have been met.

The index is consolidating within a symmetrical triangle, which is usually a continuation pattern. That implies that the break out from the triangle should be upwards. When will the break out occur? In the very near future. Remember that triangles can be unreliable – so await the break out before deciding to plunge in with both feet.

The technical indicators are showing signs of bullishness. The MACD is below its signal line and barely positive. The ROC has bounced up from its 10 day MA into positive territory. The RSI has risen to its 50% level. The slow stochastic is below its 50% level, but moving up.

The FIIs have been net buyers since the rally began three months ago. Selling by the DIIs have not been able to change the technical picture. This is a good time to rejig your portfolio by bailing out of the poor performers.

Tuesday, March 20, 2012

In the previous post two weeks ago, higher volumes on down days and negative divergences in the technical indicators had warned of a possible drop to the 200 day EMA. Gold’s price chart played out according to plan. After a day’s close below the 200 day EMA, gold’s price has moved up above its long-term moving average. Should this dip be used as a buying opportunity?

Technically, may be not yet. Note the volume bars of the last three trading days – they were falling as the price rose higher. The 20 day EMA has crossed below the 50 day EMA, and both moving averages are falling. All three technical indicators are looking bearish. The RSI is below its 50% level. The MACD is negative, and below its signal line. The slow stochastic is in its oversold zone. Some more correction can be expected, and a test of the Dec ‘11 low cannot be ruled out.

Silver Chart Pattern

Two weeks back, a ‘sell’ recommendation was given at 34. After dropping below 32, silver’s price has clambered up to 33, but on waning volumes. Despite the strong rally from Dec ‘11 low of 26 to Feb ‘12 high near 38 – a near 50% gain in 2 months - a bull market was not confirmed technically because the 50 day EMA failed to cross above the 200 day EMA. The 20 day EMA is getting ready to fall below the 200 day EMA.

The technical indicators are bearish. The RSI is below its 50% level. The MACD has fallen into negative territory below its signal line. The slow stochastic is trying to climb out of its oversold zone. All three EMAs are converging, which usually precedes a sharp move. That move is likely to be downwards.

Monday, March 19, 2012

Two weeks back, negative divergences in the technical indicators and lack of volume support were observed on the chart pattern of the S&P 500 index. The index had touched a 52 week high, but a correction appeared imminent. There was a short and sharp correction that dropped the index below its 20 day EMA and the 1350 level. But the index recovered quickly and surged to a new high above the 1400 level on a volume spurt.

The technical indicators are bullish. The slow stochastic has re-entered its overbought zone after a quick dip to the 50% level. The MACD is positive and above its signal line. The RSI bounced up after dropping to its 50% level. The ROC is rising in positive territory. But the negative divergences remain. All four technical indicators failed to reach new highs.

The US economy continues to improve ever so slowly. Weekly initial jobless claims came down to 351,000 from the previous week’s 365,000. Non-farm payrolls increased by 227,000 in Feb ‘12 – lower than growth in Jan ‘12. Retail sales rose – so did gasoline prices. AAII’s sentiment survey showed bullish sentiment rose to 45.6% (above its historical average of 39%) while bearish sentiment was 27.2% (below its historical average of 31%). Rising bullish sentiment can be a contrarian indictor.

FTSE 100 Index Chart

An overdue correction pushed the FTSE 100 index down to its rising 50 day EMA. A quick recovery followed, but a volume spurt last Friday (Mar 16 ‘12) failed to push the index above the 6000 level. All three EMAs are rising and the index is trading above them – so the bull market is alive and well.

The technical indicators are bullish, but showing negative divergences. All four touched much lower tops while the index moved higher. The slow stochastic dropped below its 50% level, but has climbed sharply to the edge of its overbought zone. The MACD is positive and touching its signal line. The RSI is just above its 50% level. The ROC is back in positive territory after dropping into the negative zone.

Fitch and Moody’s warned of possible downgrades of UK’s credit rating due to weak economic recovery and elevated debt levels. A 0.4% drop in industrial production in Jan ‘12 renewed concerns of a double-dip recession. It wasn’t all bad news. Advent of spring saw one of the best weeks of sales in department stores businesses.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices continued their strong rallies after brief corrections. As long as liquidity taps remain open, there will be no threats to the bull markets. However, prudence calls for taking some profits off the table. Alternatively, stay invested with trailing stop-losses and ride the bull rallies.

Saturday, March 17, 2012

Chart patterns of BSE Sensex and NSE Nifty 50 indices have reached a fork on the road. There is clear polarisation among bulls and bears. FIIs are flush with cash and have been net buyers for the past three months. DIIs are keeping them in check and preventing the indices from running away. Where does that leave small individual investors?

Not in a very happy situation. Many had expected the budget to spell out a clear direction for the economy and the stock market. The hopes were belied. There were a few direct tax sops, which were more than nullified by substantial indirect taxes. Big-ticket reforms have been sacrificed at the altar of survival of the present government.

Discussed below are technically bullish and bearish scenarios to help investors to plan their strategies and tactics for financial year 2012 – 2013.

BSE Sensex index chart

The Bullish Scenario

The blue up trend line shows that the rally that started from the intra-day low of 15136, touched on Dec 20 ‘11, is intact. The 50 day EMA is above the 200 day EMA, and the index is trading above the two EMAs. These are bullish signs, despite the short-term down trend that started from the intra-day top of 18524, touched on Feb 22 ‘12. The down trend line has to be breached pretty soon for the bull rally to sustain.

The technical indicators are giving mixed signals. The MACD is positive, but below its signal line. The ROC is above its 10 day MA, but has slipped down into negative territory. The RSI is below its 50% level. The slow stochastic is above its 50% level, but turning down. The likely outcome in the near term is some sideways consolidation till the supply-demand equation between bulls and bears gets resolved.

The global economic scenario is showing signs of improvement, but GDP growth is barely positive. India’s sliding GDP growth appears attractive in comparison. Budget provisions were hardly exciting, but there weren’t any negative surprises. The odds slightly favour a continuation of the three months long rally.

NSE Nifty 50 index chart

The Bearish Scenario

The weekly bar chart of the Nifty index closed marginally lower, but is trading above its 50 week EMA after bouncing up from the down trend line. But there are dark clouds on the horizon. The index has closed lower 4 weeks on the trot and volumes have been quite substantial. That indicates distribution.

The 20 week EMA has not been able to close above the 50 week EMA. Until that happens, the bears will remain in the game. There are multiple supports between 5080 and 5250 – from the two EMAs, the two trend lines and the 50% Fibonacci retracement level of the recent rally – which should protect the down side. But if FIIs give a thumbs down to the wishy-washy budget and start pulling out next week, the support levels may get breached in a hurry.

The technical indicators are bullish, but showing signs of weakness. The MACD is positive and above its signal line, but the histogram is falling. The ROC is positive and above its 10 week MA, but forming a bearish pattern of lower tops and lower bottoms. The RSI is above its 50% level. The slow stochastic is also above its 50% level after dropping from its overbought zone. To regain control, the bulls need to propel the index above the intermediate top of 5630.

Bottomline? Month long down trends on the chart patterns of the BSE Sensex and NSE Nifty 50 indices have raised question marks about the future of the bull rallies. If the up trend lines hold, the bulls will be at an advantage. But a runaway bull market should not be expected as long as oil price and interest rates remain high. Be very stock specific. Book partial profits to invest in tax-free bonds.

Friday, March 16, 2012

In the previous update, the index chart patterns of Hang Seng, TSEC and KOSPI were correcting after climbing above their respective 200 day EMAs. Investors were advised to buy selectively during the dips. Let us see how the charts have played out over the past three weeks.

Hang Seng index chart

The Hang Seng index corrected sharply below its 20 day EMA down to its rising 50 day EMA. The bounce up was equally sharp and the index is once again trading above all its three EMAs. The 50 day EMA has crossed above the 200 day EMA, confirming a return to a bull market.

All the technical indicators aren’t quite bullish yet, so a bit of consolidation can be expected before the up move can resume. The slow stochastic had dropped below its 50% level, but has climbed up above it. The MACD is positive, but below its falling signal line. The ROC tried to re-enter the positive zone, but failed. The RSI dropped below its 50% level and is trying to rise up.

The larger of the two gaps above the 21000 level (formed on the chart in Aug ‘11) has been filled. The smaller gap above the 22000 level needs to get filled before the bulls can resume control.

Taiwan TSEC index chart

The correction in the Taiwan TSEC index chart got good support from the rising 20 day EMA and the subsequent upward bounce has partly filled the huge gap above the 8000 level. There is another small gap at the 8500 level, which also needs to get filled before the bulls can wrest control. The imminent ‘golden cross’ of the 50 day EMA above the 200 day EMA will technically confirm a return to a bull market.

The technical indicators are mildly bullish. The slow stochastic is above its 50% level. The MACD is positive, but below its signal line. The ROC has bounced up from the ‘0’ line. The RSI is oscillating just above its 50% level. Some consolidation is likely prior to the next up move.

Korea KOSPI index chart

Despite the correction down to the 50 day EMA, the KOSPI chart recovered quickly and seems well on its way to fill the Aug ‘11 gap at the 2100 level. All three EMAs are rising and the index is trading above them. A bullish pattern of higher tops and higher bottoms and the ‘golden cross’ in Feb ‘12 are clear signs of a bull market.

The technical indicators are looking bullish. The slow stochastic is rising towards its overbought zone. The MACD is positive and touching the signal line. The ROC is moving up in positive territory. The RSI is climbing above its 50% level. Add to existing holdings.

Bottomline? Chart patterns of three Asian indices have returned to bull markets after spending a few months in bear territory. Small gaps in the charts formed in Aug ‘11 remain to be filled. The bears may put up their last stands at the gap levels, but are likely to be overwhelmed. Happy days seem to be here again.

Thursday, March 15, 2012

This was supposed to be an eventful week that was going to provide a clear direction for the economy and the stock market. Instead, the events that have unfolded so far have left the future of the economy and the stock market in a state of limbo. Will tomorrow’s budget announcement turn out to be a game changer?

Last week’s surprise announcement of a higher-then-expected 75 bps cut in the CRR rate by the RBI turned today’s policy announcement into a non-event. There were some hopes raised by a few experts that the RBI may cut the repo rate by 25 bps to bolster growth. That was a bit unrealistic. The rate cut may happen in Apr ‘12, provided other factors remain unchanged.

What are these other factors? Industrial production is one. The 8.5% growth in the manufacturing IIP was much higher than expectations – even though it was bolstered by some questionable data. Growth at a time of high interest rates and a liquidity crunch surely didn’t call for a interest rate cut.

The fact that WPI inflation rose in Feb ‘12 further forced the hand of the RBI governor. He had made it quite clear that curtailing inflation, even at the cost of sacrificing growth in the near term, is his prime concern. The government’s proclivity for wasteful expenditure and populist measures is stoking the fire of inflation. High cost of oil – which has not been fully passed on to consumers – is another cause of inflation that has been artificially suppressed.

The drama surrounding the announcement of the Rail budget made headlines. Except for the political party to which the rail minister belongs and the leftists who oppose everything, the rail budget was hailed as a progressive and practical one. But if the first hike in fares in more than 8 years is rolled back due to coalition politics imperatives, then the proposed spending on safety features and infrastructure projects will go to the back burner.

In front of this backdrop, we have a geriatric finance minister who is a shrewd politician but hardly a bold and visionary risk taker. What likely rabbits can he pull out of his hat to dramatically change the current political and financial mess in which the government finds itself? A few token measures may perk up the stock market in the short term, but reality will catch up soon enough.

If the budget proposals turn out to be a damp squib – and the odds of that happening are high – the FIIs may decide to reduce their buying and stall the young bull market. In a worst case scenario, they may decide to book profits. There should be no rush to buy any intra-day dip. The stock market won’t go away. It may be prudent to digest the budget proposals over the weekend and decide on the next course of action.

Wednesday, March 14, 2012

The previous technical analysis update of the stock chart pattern of Reliance Capital was posted back in Nov ‘09 (marked by a grey vertical line on the chart below). The stock price had corrected after touching an intra-day peak of 1066 in Jun ‘09 and had twice received support from the upper edge of the gap formed in May ‘09.

As long as the gap was not closed, there was hope of further upside. Accordingly, I had made the following recommendation to readers: “Existing holders can stay invested with a stop-loss at 680. New entrants should await a convincing cross above the 1050 mark.” A look at the chart below will show that my advice was timely and appropriate.

Regular readers know that I have a bias against any company with the word ‘Reliance’ in its name. If you don’t know (or remember) why, you can read this post. What is the reason then for posting this update? Well, there are two reasons. The first is to admit to a classic investing mistake. The original post on Reliance Capital in Apr ‘09 was premised on the prospect of likely monetisation of the company’s ‘hidden assets’ – its huge asset management business (Reliance Capital had the highest AUM back then) and its thriving insurance and financial services businesses. The mistake? Hidden assets may stay hidden and never get monetised. (This is particularly true for ‘holding companies’ that hold huge number of shares in different companies.)

The second and more important reason is to warn new investors that though the stock price had more than doubled – from the intra-day low of 225 (Jan 2 ‘12) to an intra-day high of 482 (Feb 22 ‘12) – during the recent rally, the stock is technically still in a bear market and in a down trend. There is no reason to enter now.

Let us have a look at the three years daily bar chart pattern of Reliance Capital:

The gap in the chart formed in May ‘09 – approximately between 620 and 680 – was filled a year later. That opened up further downsides and triggered the stop-loss of 680 mentioned in the previous update. The stock price bounced up from the lower edge of the gap, and over the next 5 months, gained 40%. But it formed a lower top that marked the beginning of a sharp down trend, which coincided with the bear phase in the broader market.

Note the sideways consolidation between 620 and 680 during Dec ‘10, before a convincing break down below 620 in Jan ‘11. A ‘panic bottom’ formed at 478 in Feb ‘11, following which the stock price bounced up quickly – only to face strong resistance from the earlier support level of 620 in Apr ‘11 and Jul ‘11. This is another example of how a breached resistance level becomes a support level, and a broken support level becomes a resistance level. Another point to note is that support-resistance levels provide better and safer entry-exit points than Fibonacci levels or EMA levels.

The stock price is oscillating near its 200 day EMA. The 50 day EMA is still below the 200 day EMA. The technical indicators are mildly bullish. The MACD is positive and just below its falling signal line. The ROC is also positive and above its 10 day MA, but has turned down. The RSI is a little below its 50% level. The slow stochastic has climbed above its 50% level. The stock price is trying to move up to test the blue down trend line once more, but the falling volumes mean another likely failure of an upward break out attempt.

Bottomline? The stock chart pattern of Reliance Capital is a clear example of disenchantment within the investing community. The recent sharp rally may have provided huge short-term gains to a fortunate few. If you are one of them, book your profits. New investors can look at a company like Sundaram Finance. If you don’t trust the Ambanis, avoid all companies with ‘Reliance’ in its name.

Tuesday, March 13, 2012

The Index of Industrial Production (IIP) published by the government each month is supposed to give an idea about what is going on in the economy. The Jan ‘12 figure of 6.8% came as a positive surprise, because the IIP number for Dec ‘11 was only 2.5%, and the consensus estimate for Jan ‘12 was about 2.1%. Naturally, the much higher figure seemed to indicate that growth was returning to the Indian economy.

The stock market should have celebrated the news – but didn’t. Were market participants ‘selling on news’, or did they ignore the news as unbelievable? Digging a little deeper into the published data raises more questions than answers.

Manufacturing growth was at a respectable 8.5%. But that growth was largely due to a whopping 92.6% growth in food products and beverages; 56.1% growth in printing, publishing and reproduction of recorded media; and 29.9% growth in medical, precision and optical instruments, watches and clocks. Minus these three items, manufacturing growth would be negative.

In plain English, the above data means that Indian citizens consumed almost twice the amount of food and drinks than what they did in Jan ‘11. Surely, population increase and rural prosperity through the NREGA scheme had roles to play. But 92.6% growth is hard to believe. So is the data that indicates a sudden rise in reading books, newspapers and listening to music and watching movies at home.

A growth in medical instruments may be explained away by the proliferation of modern hospitals and clinics. But why the propensity for buying watches and clocks? Of course, the published data has the following disclaimer: “Indices for January ‘12 are Quick Estimates.” May be the data collection was outsourced and improperly supervised.

More intriguing are the areas of de-growth. Electrical machinery and apparatus fell by –30.5%. Office, accounting and computing machinery fell by –14.1%. Radio, TV and communication equipment and apparatus fell by –13.8%. India is definitely not shining if electrical machinery, computers and communication equipment are showing de-growth.

As happens almost every month, these ‘Quick Estimates’ get revised subsequently. Which means these initial numbers don’t count for much and don’t indicate any trend. The collective wisdom of market participants in ignoring the Jan ‘12 IIP growth number proved correct in this instance.

Monday, March 12, 2012

Both index charts – BSE Sensex and NSE Nifty – show classic break outs above down trend lines followed by pullbacks and upward bounces from the down trend lines. That should mean that trend reversals have occurred and it is time to buy. But all is not well as yet.

Results of the elections in five states have come and gone. The market was not expecting the thrashing that the Congress Party got at the hustings. There are rumblings from UPA partners about big-brotherly treatment. Another surprise was the 75 bps cut in the CRR announced by the RBI prior to its Mar 15 review meeting – probably to preempt the likely liquidity shortfall in the system due to advance tax payments. The better-than-expected manufacturing IIP number has further confused market players.

RBI’s Mar 15 meeting appears to have become a non-event. The good IIP number may dash any possibility of a cut in interest rates. Some experts are already suggesting that the CRR cut will be inflationary. Very little is expected from the Mar 16 budget announcement from a government that has backed itself into a corner financially and politically, with its populist measures and inability to take tough decisions.

BSE Sensex index chart

In the weekly bar chart of the Sensex, last week’s bar shows a dip below the down trend line followed by a strong upward bounce. The ‘golden cross’ of the 20 week EMA above the 50 week EMA has not taken place yet. The technical confirmation of a bull market is still awaited.

The weekly technical indicators remain bullish, but there are signs of weakness. The MACD is positive and above its signal line, but it has stopped rising and the histogram has started falling. The ROC is positive and above its rising 10 week MA. The RSI has started falling towards its 50% level. The slow stochastic has slipped down from its overbought zone.

The pre-budget rally may turn out to be a sideways consolidation. A budget without any negative surprises may provide the trigger for the rally to resume in earnest.

NSE Nifty 50 index chart

The daily bar chart pattern of the Nifty shows the break out above the down trend line, followed by a pullback and then a bounce up with a gap. Note that the volume bar is smaller on last Friday’s bounce up. That is not a positive sign for bulls.

The technical indicators are bearish, but showing signs of a turnaround. The MACD is falling below its signal line, but hasn’t yet entered negative territory. The ROC is negative, but is trying to cross above its 10 day MA. The RSI has bounced up from the edge of its oversold zone, but remains below the 50% level. The slow stochastic is trying to emerge from its oversold zone.

The 50 day EMA has crossed above the 200 day EMA, signalling a return to a bull market. But see what happened back in Apr ‘11 (left part of chart above). The 50 day EMA crossed above the 200 day EMA – only to drop back below it. Any fall below the down trend line can snuff out the bull rally.

Bottomline? Chart patterns of the BSE Sensex and NSE Nifty 50 indices have bounced up nicely after pullbacks to their down trend lines. Such bounces from resistance levels offer entry opportunities – provided there is adequate volume support and bullish technical indications. These seem to be lacking – probably because of the budget announcement hanging like the proverbial sword of Damocles. Those who are already invested should hold with stop-loss at the levels of the down trend lines. New entrants should await the budget announcement.

Sunday, March 11, 2012

To reap the benefits of high interest rates prevailing in the market, many investors have been booking profits in the stock market and parking the proceeds in bank fixed deposits (FD). But the interest received from bank FDs is taxable. It is that time of year when advance taxes need to be paid. Shouldn’t investors be looking at saving taxes by investing in infrastructure bonds and tax-saving bonds?

In this month’s guest post, Nishit explains the basic difference between infrastructure bonds and tax-saving bonds, and recommends that investment in tax-savings bonds is definitely worth considering seriously.

Tax-saving bonds are the flavour of the month. Let us try and ascertain if they are worth buying. Earlier in the year, Infrastructure Bonds were introduced. Some of those bond issues are still open. How are the current tax-saving bonds different from the Infrastructure Bonds?

For starters, to avail tax breaks in the infra bonds, the limit up to which one could invest was Rs 20,000. This Rs 20,000 would be deducted from your taxable income for the year. This would save about Rs 6,180 in the highest tax bracket. The interests from these bonds are not tax free and would be added to one’s taxable income in subsequent years. The interest rates offered were in the rage of 8-8.25% per annum.

The tax-savings bonds being offered now are of a different type. In these bonds, a retail investor can invest Rs 1 lakh for a period of 10-15 years. These bonds are offered by various government undertakings like REC, NHAI, PFC and are hence safe investments. The bonds offer tax free returns as the interest is not taxable. The interest rates are about 7.93% to 8.32%. This means if Rs 1 lakh is invested, then upto Rs 8,130 interest which one gets annually is not taxed. Over a period of 10 years, this amounts Rs 81,300 which is not taxed. To get equivalent returns from a taxable bank FD, the interest rate one should get is about 11.5%. There is no bank FD which falls under the ‘safe category’ offering such returns.

The REC issue is due to get closed on the 12th of March, 2012 and one can definitely look at further similar issues hitting the markets. The benefit of such issues over the infrastructure bonds is that one can save a much larger amount of tax.

Details of REC issue as below:

There is another tax free bond in the market! REC or Rural Electrification Corp. Ltd. is going to raise Rs 3,000 Crore by selling tax free secured redeemable non-convertible bonds . The subscription will open on March 6 and close on March 12 , 2012. While it is being sold that the interest on the bond will be tax free, it is important that subscribers should know other aspect of this tax free bond issue.

Individual/HUF limit reduced due to a notification dated February 14 issued by Central Board of Direct Taxes (CBDT) clearing the issue has said that “any individual investing over Rs 1 lakh will be classified as high net worth individual (HNIs)”.

The income by way of interest on these Bonds shall not form part of total income as per provisions under section 10(15)(iv)(h) of I.T. Act, 1961;

There shall be no deduction of tax at source from the interest, which accrues to the bondholders;

As per provisions under section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of 20% of capital gains calculated after reducing indexed cost of acquisition or 10% of capital gains without indexation of the cost of acquisition;

Wealth Tax is not levied on investment in Bond under section 2(ea) of the Wealth-tax Act, 1957.

Note: The investment limit for Category III investors has been increased from Rs 1 Lakh to Rs 5 Lakhs.

(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Saturday, March 10, 2012

There is nothing like a nice, long bear market to separate the men from the boys. Banking sector stocks have been no exception. Back in Dec ‘10, banking sector stocks were undergoing corrections after touching new highs. Those corrections turned out to be the first phase of a 14 months long bear market.

There are two schools of thought in the stock market. One group believes that stocks that have undergone deeper corrections during a bear market, are likely to gain more during the subsequent bull rally. There may be some truth to this line of thought – if gains are measured in percentage terms from the lows.

The other group prefers stocks that fall less during a bear phase, but recover more quickly in the subsequent bull phase – even though the gains may not be high in percentage terms. If you are not sure which group you should follow, have a look at the charts of ten banking sector stocks below to help you to decide.

Punjab National Bank

Punjab National Bank’s stock was one of the star performers during the bull phase from Mar ‘09 to Nov ‘10. The bear market shaved 46% off its peak level of 1395. The recent bull rally from its Dec ‘11 low of 751 pierced the 200 day EMA from below and reached 1091 – a 45% gain from the low. But the stock price remains in a bearish pattern of lower tops and lower bottoms and has slipped down below its 200 day EMA. Technically, the stock is in a bear market. Avoid.

Bank of Baroda

Bank of Baroda’s stock dropped from a peak of 1050 in Nov ‘10 to a low of 630 in Dec ‘11 – a 40% fall. The recent rally topped out at 881 – a gain of 40% from its low. The stock is trading above its 200 day EMA, but is still in a bearish pattern of lower tops and lower bottoms. Hold.

Central Bank

Central Bank’s stock made a double-top at 249 during Oct-Nov ‘10 and fell steadily down to touch a low of 63 in Jan ‘12 – a 75% fall from its peak. Though the recent rally gave a 76% gain from its low to its intermediate top of 111, the stock is trading below its 200 day EMA and remains deep inside a bear market. Avoid.

Corporation Bank

The stock price of Corporation Bank fell 59% from its top of 815 to its bottom of 335. The subsequent rally gained 57%. The stock is struggling to stay above its 200 day EMA, and remains in a down trend. Note the sharp volume spike as it crossed above its 200 day EMA – an indication that it may not fall much further. Hold.

Indian Overseas Bank

Indian Overseas Bank’s stock dropped 58% from its peak of 176 to a low of 73. Though the stock price rose sharply above its 200 day EMA – gaining 73% from its low – it has dropped equally fast and remains in a bear market. Avoid.

HDFC Bank

A favourite of the FIIs for obvious reasons, HDFC Bank’s stock has risen steadily to touch a new high in Feb ‘12 – forming a bullish pattern of higher tops and higher bottoms. Despite several drops below its long-term moving average, the stock is in a bull market. If you think that HDFC Bank’s stock is too expensive, and it is better to go for ‘cheap’ stocks like Central Bank of Indian Overseas Bank – think again. Cheap can get cheaper. Buy.

ICICI Bank

The stock price of ICICI Bank lost almost 50% from its peak of 1277 in Nov ‘10. The recent rally produced a 55% gain from its Dec ‘11 low of 641. The stock is in a clear down trend and struggling to get out of its bear market. Hold.

Axis Bank

Axis Bank’s stock touched a high of 1608 in Oct ‘10 and a trough of 784 in Jan ‘12 – a 51% loss. The sharp rally to 1309 means a 67% gain. But the stock price is in a long-term down trend and struggling to get out of a strong bear grip. Hold.

Kotak Mahindra Bank

The stock price of Kotak Mahindra Bank is in a bull market and touched a new high in Feb ‘12. The subsequent correction is receiving good support from its 20 day EMA. Buy.

Yes Bank

Yes Bank’s stock made a double-bottom (in Feb ‘11 and Jan ‘12) reversal pattern and re-entered a bull market. The stock is consolidating, and should test and break above its Nov ‘10 top of 388. Buy.

Friday, March 9, 2012

A month ago, the chart patterns of the Jakarta Composite, Singapore Straits Times and Malaysia KLCI indices were looking bullish, after recovering well from bear attacks. The bulls have been trying hard to regain control and momentum. But the bears are still reluctant to give up ground. In the process, some interesting chart patterns have been forming.

Jakarta Composite Index Chart

The Jakarta Composite index never entered a bear market technically. The 50 day EMA had bounced off the 200 day EMA back in Oct ‘11, and has been moving up since. After a sharp drop below the 200 day EMA and an equally sharp recovery, the index has been trading within an upward-sloping channel for the past four months.

The interesting thing to note is that the index faced strong resistance from the 4030 level, where it had earlier faced resistance in Jul, Aug and Sep ‘11. As a result, the index has not been able to make any headway for the last two months – though it is trading above its rising 200 day EMA and is technically in a bull market.

The technical indicators are mildly bullish. The MACD is barely positive and has merged with its signal line. The ROC has crossed above its 10 day MA into positive territory, but appears unable to decide which direction it wants to go. The RSI is resting at its mid-point. The slow stochastic has dropped from its overbought zone.

The bulls still have some work left to be able to test the Aug ‘11 top of 4196.

Singapore Straits Times Index Chart

The Singapore Straits Times index climbed smoothly above all three EMAs. The ‘golden cross’ of the 50 day EMA above the 200 day EMA (marked by light blue oval) technically confirmed a return to a bull market. But the lower edge of the gap (at 3030 level) formed in Aug ‘11 is providing strong resistance to the bull rally.

After a short correction down to its rising 50 day EMA, the index has bounced up smartly. But the technical indicators are yet to turn bullish. The MACD is still positive, but has made a bearish ‘inverted saucer’ pattern and is falling below its signal line. The ROC has dropped into negative territory. The RSI is below its 50% level. The slow stochastic bounced up from the edge of its oversold zone, but is below its 50% level.

The bulls need to concentrate their efforts on closing the Aug ‘11 gap before they can hope to regain control.

Malaysia KLCI Index Chart

The Malaysia KLCI index chart is clearly trending up in a bull market, and looks the most bullish of the three indices. After coming within two points of its Jul ‘11 top of 1597, the KLCI index had to beat a slight retreat. Will the brief setback turn into a correction?

The technical indicators are suggesting the possibility. Volumes have reduced considerably and all four indicators touched lower tops (marked by blue arrows) as the index rose to test its previous top. The combined negative divergences may pull the index down some more.

Note that all three EMAs are rising in tandem and the KLCI is trading above them. That is a clear sign of a bull market. Do not make the mistake of shorting a rising index. Use any dips to add.

Bottomline? The Asian index chart patterns are back in bull markets. The bears haven’t given up the fight, but are slowly losing ground. Once the nearby resistance levels are overcome, the bulls will regain complete control. Add the dips and maintain trailing stop-losses.

Be aware of related information – dividends, interest on debentures/bonds, tax implications of buying and selling of various securities

Have working knowledge of economic concepts – supply and demand, money supply, inflation/deflation/stagflation/recession, surplus/deficit, interest rates, impact of global economies on domestic economy, effect of economic changes on different business sectors

But the most important skill of all is to learn about oneself – the behavioural traits that determine who will be a successful investor and who will be an ‘also ran’.

In a recent article posted at investopedia.com, the following behavioural model developed by Bailard, Biehl and Kaiser was presented:

Investors are classified according to their decisions and actions (‘impetuous’ at one end and ‘careful’ at the opposite end) as well as their levels of confidence (‘confident’ at one end and ‘anxious’ at the other end). Based on these behavioural traits, investors are divided into five groups:

Celebrity – anxious and impetuous, a follower of the latest investment trends

Adventurer – confident and impetuous, a strong-willed risk taker

Individualist – confident and careful, with an analytical and self-reliant approach

Apparently, greatest investment success is achieved by those with the ‘Individualist’ behavioural trait. What if one has one of the four other behavioural traits? Should they exit from the stock market?

With discipline and perseverance, behavioural patterns can be changed – provided one is aware which behavioural category one belongs to.

Wednesday, March 7, 2012

The previous detailed update to the technical analysis of the stock chart pattern of DLF Ltd. was posted more than two years back (date marked by the grey vertical line on the chart below). A further update since then had not been considered necessary because there wasn’t anything new to add to the following recommendations:

“The stock chart pattern of DLF Ltd. does not hold out much hope for the bulls. If you are still stuck at higher prices, continuing to hold may increase your losses. Investors should not go anywhere near this stock.”

So, why take a re-look at the DLF Ltd. chart now? The motivation came from the considerable interest generated by a recent report published by a Canada-based equity research house that tore the company’s business practices and financial condition to shreds. That report was based on fundamental analysis. But technical signals had warned of the decimation in the stock’s price back in Oct-Nov ‘09.

The weekly bar chart pattern of DLF Ltd shows the steady fall from the 3 yr high of 491, touched in Oct ‘09. The stock fell almost 65% to its Jan ‘12 low of 173. But that pales in comparison to the 90% fall from its all-time high of 1225 touched on Jan 15 '08 to the bottom of 124 on Feb 4 '09.

The subsequent rally led to a 300% gain (from 124 to 491) but retraced only a third of its bear market fall – less than the Fibonacci retracement level of 38.2%. That means the entire gain from 124 to 491 was a bear market rally within the long-term bear market that started from Jan ‘08. Hence the call to investors not to go anywhere near the stock. Very few stocks manage to recover from a 90% fall.

Note that the stock price formed a ‘reversal week’ pattern (higher high, lower close) when it touched 491 in Oct ‘09. A ‘distribution week’ pattern (high near open, close near low on higher volumes) followed the next week. The stock price then entered a bearish ‘rising wedge’ pattern.

After the expected break below the ‘rising wedge’, the stock dropped to 251 in May ‘10 but formed a ‘reversal week’ pattern (lower low, higher close) that marked the end of the first phase of the down move. A counter-trend rally took the stock price above the 20 week and 50 week EMAs to a high of 397 in Oct ‘10. Again, a ‘reversal week’ pattern (higher high, lower close) marked the end of the intermediate rally.

The next leg of the down move dropped the stock to a low of 173 in Aug ‘11. A bounce saw the stock price reach a high of 251 in Nov ‘11 before falling back to test the low of 173 in Jan ‘12. A rally along with the broader market took the stock to a high of 261 in Feb ‘12, when another ‘reversal week’ pattern ended the brief rally. Note the negative divergences in three of the four technical indicators (marked by blue arrows) that warned of a correction, which started even before the adverse report hit the market.

The weekly technical indicators are turning bearish. If the stock breaches its recent low of 173, it can drop all the way to test its Feb ‘09 low of 124. If you are holding the stock, ask yourself: Why?

Bottomline? The stock chart pattern of DLF Ltd. is in a long-term bear market that started more than 4 years ago, and shows no sign of ending. After years of financial shenanigans and taking customers and investors for a ride, the chicken are coming home to roost. The company is desperately trying to sell-off assets to survive, but are finding few takers. The stock doesn’t deserve to be an index constituent. AVOID.